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On Consumption Bunching under Campbell-Cochrane Habit Formation

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  • Ljungqvist, Lars

    ()
    (Dept. of Economics, Stockholm School of Economics)

  • Uhlig, Harald

    ()
    (CentER for Economic Research)

Abstract

Campbell and Cochrane (1999) propose a preference specification that can explain a wide variety of asset pricing puzzles such as the high equity premium. They augment the basic power utility function with a time-varying subsistence level, or "habit", which is in the spirit of "catching up with the Joneses" but with a novel nonlinear mapping of consumption into habit. This paper demonstrates a surprising implication of the Campbell-Cochrane preference specification: consumption bunching is desirable.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 337.

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Length: 12 pages
Date of creation: 22 Oct 1999
Date of revision:
Handle: RePEc:hhs:hastef:0337

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Keywords: Catching-up-with-the-Joneses preferences; habit; consumption bunching;

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  1. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(2), pages 205-251, April.
  3. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 356-366, June.
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Cited by:
  1. Thomas Tallarini & Harold Zhang, . "External Habit and the Cyclicality of Expected Stock Returns," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 1997-26, Carnegie Mellon University, Tepper School of Business.
  2. Mary C. Daly & Daniel J. Wilson, 2006. "Keeping up with the Joneses and staying ahead of the Smiths: evidence from suicide data," Working Paper Series, Federal Reserve Bank of San Francisco 2006-12, Federal Reserve Bank of San Francisco.

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